Price-Fixing Versus the Poor

Price-fixing has a bad reputation. Government prosecutors like to go after competing companies that allegedly collude to set the same prices on their products. Consumers under collusive price-fixing pay more than they would in an open market. The poor are disproportionately burdened, particularly on essential goods.

But in fact, the government equivocates about price-fixing. In some cases it condones and even facilitates it.

A tariff, for instance, fixes prices artificially high. Imported goods could be cheaper to the consumer, but a tax is added that raises the price. So consumers are forced to overpay.

Historically, Democrats have assailed tariffs. President Grover Cleveland in the late 19th century attacked them. His Secretary of Agriculture J. Sterling Morton had earlier thundered against the lumber tariff, stating that because of the tariff, the United States was “paying a bounty of at least two dollars a thousand feet on lumber” in order to “shut out competition from Canadian forests.” Home-construction costs were raised to the harm of consumers, especially the poor.

Consumers, including poor consumers, benefit when the free competition of open markets forces prices downward. When they can pay $4 for what would otherwise cost $5, they have an extra dollar to invest in savings or other purchases.

Prices have a similar effect on businesses. Businesses are consumers, after all, and they shop for the best values on the components of their business. One of businesses’ major purchases is labor. Employers must achieve a certain level of productivity from each worker to justify that expense.

When worker costs climb too high, the business has to make some kind of adjustment. For instance, increases in the cost of employee health care are, in effect, a raise to the employee, even though they are not reflected in a worker’s paycheck. If the worker is not correspondingly more productive, it’s an unearned raise.

Businesses may be forced to recover this cost through a smaller workforce — that is, layoffs. Or they may seek a workforce elsewhere that can get the same job done at a lower cost — that is, outsourcing.

Outsourcing is nothing new. Grand Rapids, Mich., was the “furniture capital” of the country until furniture manufacturing was outsourced to the American South. Still, businesses that outsource are currently viewed as villains. If they transfer any operations across international borders, argue their opponents, they should be forced by government to pay a huge penalty.

Government would then be a price-fixer, setting a floor on the cost of labor services. If a business tried to evade that price control, it would have to pay a kind of tariff on job “exports.”

Such a policy might save jobs for a while. But if an employer’s sales are lost to a lower-cost competitor, layoffs result. If the higher-cost business closes, there are no jobs for anyone.

And an anti-outsourcing policy might well encourage others to demand similar privileges. For instance, former workers in electronic-equipment manufacturing might demand that electronic components be priced as if they were built at high domestic wage rates. Then electronics corporations would have no reason to build new factories overseas, so that past outsourcing would be redressed by government-incited insourcing.

Ironically, those in the anti-outsourcing lobby would probably be among the consumers squawking loudest at the ensuing high prices for computers, TVs and DVDs. Inevitably, we all wear two hats. As employees we want top dollar for our services, but as consumers we shop where we can get the most for our money.

When we can’t get the most for our money, everyone can suffer — especially, once again, the poor. Consider government price-fixing during the Great Depression. When the National Industrial Recovery Act authorized the federal government to put a straitjacket on the prices of labor and goods, it throttled business productivity and flexibility, forcing many more workers into unemployment and helping worsen the economic depression. This was very hard on the poor.

When businesses are left free to innovate, both consumers and workers benefit. The case of Grand Rapids illustrates the point. “Outsourced” Southern-built furniture provided the lower prices that enabled millions of new homeowners in the post-World War II boom to buy more furniture. Meanwhile, Grand Rapids responded inventively, turning itself into the “office furniture capital” of the nation. Peak employment involved more high-value workers than were ever hired in West Michigan’s former furniture heyday, and the inflow of revenues spurred further investments and jobs in the area.

Free markets spur new solutions and price reductions that government price-fixing cannot. Anti-outsourcing panaceas will inevitably malfunction, and measures meant to help workers will instead become their shackles, weighing most heavily on the poor.

Daniel Hager is an adjunct scholar with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.